Junior exploration programs will be ‘pruned to the bone,’ Macquarie says

In a new report on junior precious metal explorers that looks at which companies will have the cash to survive the current market and the decline in the gold price, analysts at Macquarie Equities Research predict that exploration programs will be “pruned to the bone with only a few exceptions;” very few equity financings will be completed during the remainder of 2013; and that the market will be pricing in US$1200 per oz. gold.

“The days of large exploration budgets are essentially over,” Michael Gray, Pierre Vaillancourt, Shawn Campbell and Darren Wiebe conclude in an Apr. 15 research note to clients. “It is particularly difficult for juniors with compelling early discoveries that need significant follow-up drilling (like Gold Standard Ventures (GSV-V)) unless a strategic investor comes to the rescue [like Agnico-Eagle Mines’ (AEM-T, AEM-N) recent investment in ATAC Resources (ATC-V)].”

“Other juniors that are trying to advance resources and de-risk projects will have a tough time resonating with the market (Eastmain Resources (ER-V)) unless there are potentially game-changing drill results (Probe Mines (PRB-V)),” they note.

At the same time, assets are cheap and juniors that have cash can capitalize on the opportunity. Macquarie singles out Virginia Mines (VGQ-V), Mirasol Resources (MRZ-V), and Strategic Metals (SMD-V) as examples of companies with more than $40 million in working capital that could make strategic investments, acquire strategic land positions, and do joint ventures on drill-ready projects. These companies have “relatively low burn rates in 2013” the analysts say, and “investors that seek exploration leverage in this market without dilution risk should consider these nimble well-run companies as defensive names.”

On the mergers and acquisitions front, the Macquarie team contends that intermediate producers and some of the small producers “are sharpening their knives” and that in their opinion, the companies “with the best exposure to M&A” are MAG Silver (MAG-T, MVG-X), Belo Sun Mining (BSX-T), Midas Gold (MAX-V) and Eastmain Resources.

“The safer names are those cashed-up with assets of retained value,” they continue, adding that Virginia Mines, Mirasol Resources, Strategic Metals, MAG Silver and Torex Gold Resources (TXG-T) all fall into that category in their view. The analysts’ top picks in that segment of the market are MAG Silver, Torex and Mirasol.

“MAG has best-of-breed silver assets including a joint venture with Fresnillo (FRES-L) that we believe may result in a bid for MAG,” they write. “Torex has a high-grade/high-margin development project in Mexico that is largely financed,” while Mirasol “has a new discovery in Chile, albeit early stage, that could be part of a large new gold district.”

And unless junior explorers such as Eastmain, Gold Standard Ventures, Midas Gold and Belo Sun Mining cut their 2013 programs and budgets, the analysts maintain, they could wind up having stressed balance sheets. In particular they point to Gold Standard Ventures as an example. The junior has “one of the most compelling exploration drill hole plays” that they cover and “could deliver game-changing drill results” at its Railroad project in Nevada. But at the same time, the target is “drill-capital intensive and securing equity financing will likely require ongoing positive results,” which they add, are “never a given.”